ECO 151 – Microeconomics

Chapter one: What economics is all about

Slide 1

Good day ECO 151 students. Welcome to the first session of microeconomics, this session
we focus on chapter one from your prescribed text book, discussing what economics is all
about.

Slide 2

What is economics? What is it concerned with?

As a student, you have to make choices every day. You have to decide when you going to do
your assignments, which assignments you going to do first, when you going to study for a test
or should you just watch a movie. This is essentially what economics is all about, making
choices every day. But why do we need to make these choices? As Individuals we have
unlimited wants; we all want a lot of things but the means to satisfy these wants are scarce
because of limited resources. Therefore we have to make decisions all the time.

Slide 3

Economics is usually divided into two parts, microeconomics and macroeconomics.

Microeconomics focus on the individual parts of the economy. It is the decisions and
functioning’s of decision makers such as individual consumers, households, firms or other
organisations. Whereas macroeconomics is concerned with the economy as a whole, we study
total or aggregate economic behaviour.

Slide 4

In the textbook on page 5, there are some examples in box 1-1 on what microeconomics
study and what macroeconomics study. To mention a few, in microeconomics we study the
price of a single product, where as in macroeconomics we study the consumer price index. In
Microeconomics we study the decisions of individual consumers and macroeconomics we
study the combined outcome of the decisions of all consumers in the country.

Slide 5
In this section 1.3, we focus on scarcity, choice and opportunity cost. Earlier, we learnt that
wants are unlimited, but the means with which the wants can be satisfied are limited. Note
that, Wants are not the same as needs and demands. Wants are human desires for goods and
services. Needs are necessities, things that are essential for survival such as food, water,
shelter. And Demand has to be backed by purchasing power. In other words, there is a
demand for a good or services only if those who want to purchase it have the necessary
means to do so.

Slide 6

We live in a world of scarcity and because scarcity, choices have to be made. Every time a
choice is made, opportunity cost is incurred. Opportunity cost is defined as the value to the
decision maker of the best alternative that could have been chosen but was not chosen. For
example, if you had to choose only between studying and going to the movies, the
opportunity cost of studying would be the visit to the movies that you have to forgo.

Slide 7

The scarce resources that are used to produce goods and services are called factors of
production. There are five factors of production: Natural resources (or land), Labour, Capital,
Entrepreneurship and technology. Natural resources consist of all the gifts of nature such as
mineral deposits and water. These Natural resources are fixed in supply and their availability
cannot be increased if we want more of them. Labour can be defined as the exercise of human
mental and physical effort in the production of goods and services. Capital comprises all
manufactured resources, such as machines, tools and buildings, which are used in the
production of other goods and services. Entrepreneurship, the factors of production are
combined and organised by people who see opportunities and are willing to take risks by
producing goods in the expectation that they will be sold at a profit. Technology is the fifth
factor of production, when new knowledge (or inventions) is discovered and put into practice,
more goods and services can be produced with a given amount of labour natural resources,
labour, capital and entrepreneurship. Example, modern computers.

Note that money is not a factor of production. Goods and services cannot be produced with
money. Money is a medium of exchange.

Slide 8
Scarcity, choice and opportunity cost can be illustrated with the aid of a production
possibilities curve, also called a production possibilities frontier. Table 1-1 on page 13
represents production possibilities for the Wild Coast community whose main foods are
potatoes and fish. If the community devotes all their available time and resources to fishing,
they can produce five baskets of fish per working day. On the other hand, if they spend all
their production time on gardening, they can produce 100 kilograms (kg) of potatoes. It is
possible for them to produce either 5 baskets of fish or 100kg of potatoes, but in each case the
entire production of the other good must be sacrificed. If the community want to enjoy a diet
which includes fish and potatoes, they have to use some of their resources for fish production
and some for potato production. They are then able to produce any of the combinations
shown in table 1-1. These combinations represent the maximum amounts which can be
produced with all the available resources. If the people in this community decide to produce
combination E, they will be able to produce 4 baskets of fish and 40kg of potatoes per day.
But in producing these combinations they have to decide not to produce more fish or more
potatoes. In producing 4 baskets of fish, they have to forgo the additional 60 kg of potatoes
which they could have produced if they used all their resources to grow potatoes. Likewise,
in producing 40 kg of potatoes they have decided to forgo the extra (5 th) baskets of fish they
might have produced. The opportunity cost of producing the 40 kg of potatoes is the basket of
fish; and the opportunity cost of producing the 4 baskets of fish is 60 kg of potatoes that have
to be forgone. The community therefore has to choose between more potatoes and less fish,
or more fish and less potatoes. Given the available resources, it is impossible to produce more
of one good without decreasing the production of the other good.

Slide 9

The different alternatives can be illustrated graphically in a production possibilities curve

(PPC) as shown in figure 1-1 on page 14 in the textbook. Fish production is measured along
the horizontal axis and potato production on the vertical axis. The combinations in the table
are represented by points A, B, C, D, E and F in the diagram. The points are joined to form a
curve. As we move along the production possibility curve from point A to F, the production
of fish increases while the production of potatoes decreases.

Scarcity is illustrated by the fact that all points to the right of the curve (such as G) are
unattainable. The curve therefore forms a frontier or boundary between what is possible and
what is not possible. Choice is illustrated by the need to choose among the available
combinations along the curve. And Opportunity cost is illustrated by what we refer to as the
negative slope of the curve, which means that more of one good can be obtained only by
sacrificing the other good. Point H in the diagram denotes 70 kg of potatoes and two baskets
of fish. This combination is obtainable but inefficient.

Slide 10

To summarise, Attainable combinations is illustrated by all points on or inside the PPC.

Unattainable combinations are illustrated by all points beyond the PPC. Efficient
combinations are illustrated by all points on the PPC. Inefficient combinations are illustrated
by all points inside the PPC. An increase in potential output will shift the PPC curve outward.
On the production possibility curve actual output is equal to potential output. The aim is
produce the maximum attainable combinations of goods and services. In other words, the
scarce resources should be used fully and efficiently. If the quantity or quality of available
resources where to increase or production techniques were to improve over time, the
production possibility curve would shift outward. Such an outward movement illustrates
economic growth.

Slide 11

The production possibility curve indicates the combination of any two goods and services
that are attainable when the community’s resources are fully and efficiently employed.

Slide 12

The community would have preferred a combination beyond the PPC such as point G shown
in figure 1-1 but point G is unattainable. However, if the quantity or quality of available
resources where to increase or production techniques were to improve over time, the
production possibility curve would shift outward. Such an outward movement illustrates
economic growth.

Slide 13

Figure 1.2 illustrates the original production possibility curve as AB. If there is an improved
technique for capital goods, capital increase from B to C. The new production possibility
curve is now illustrated by AC. Except at point A, it is now possible to produce more capital
goods and more consumer goods than before. For example, at point Y more of both types of
goods are produced than at point X.
Slide 14

Figure 1.3 illustrates and improved technique for producing consumer goods (on page 17 in
the latest edition)

Slide 15

If there are example, two types of goods, consumer and capital goods and a better technique
for producing consumer goods is found, it means that using this improved technique, more
consumer goods can be produced with the available resources/factors of production. The PPC
swivels from AB to DB.

Slide 16

Figure 1.4 illustrates an increase in the quantity or productivity of the available resources
(page 18 in the textbook)

Slide 17

An increase in the quantity or productivity of resources makes it possible to produce more

consumer and capital goods. The PPC shifts outward from AB to EF.

Slide 18

The last section in chapter one, discuss economics as a social science. Economics helps us to
explain what is happening, to predict what might happen and to assist policy makers to devise
or choose appropriate economic policies.

Slide 19

Economics is a social science, social meaning it’s the study of behaviour of human beings. It
is different from natural science in respect of what is studied and how it is studied. In
economics we don’t have the luxury of lab experiments, we can’t put people in test tubes.
Economists can’t hold things constant (as you would be able to do in a lab). Note the
difference, the laws are not absolute (in science, when x happens, you can be sure it will
happen). For example, the law of gravity, what goes up must come down. But if prices go up,
what will happen to demand for that product. This is dependent on a number of things
including what the product is.
Slide 20

Science is a systematic attempt to discover regular patterns of behaviour. It is used to explain

and predict what might happen so that we can plan for things and avoid or minimize negative
impacts.

Slide 21

Laws are conditional so if there’s a law in economics, usually add: ‘provided all other things
remain the same/constant’

In economics we say CETERIS PARIBUS, Latin for ‘all other things being equal’